Regulators Propose Changes to Regulatory Capital Framework

On July 27, 2023, the Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), and Federal Deposit Insurance Corporation (FDIC) issued a joint notice of proposed rulemaking that would significantly alter the regulatory capital calculation framework for banks with total assets of more than $100 billion and banks with significant trading activity.

Community banks and credit unions will not be impacted. It’s believed that the new framework was proposed, in part, to address the bank failures earlier this year by: 1) having impacted banks include unrealized gains and losses from certain securities in their capital ratios, and 2) demonstrating increased supervision by the agencies.

If finalized as-is, which is unlikely, the proposal would increase the amount of capital a bank must hold by changing how certain risks are calculated, with new measures for lending, trading, and internal operations — referred to as the “expanded” approach. It would also impose new capital requirements on certain mid-size banks (those between $100 billion and $250 billion), increasing the capital requirements for those institutions. The proposal is based on international capital standards issued by the Basel Committee on Banking Supervision years ago, referred to as the Basel III endgame, but is considered more stringent.

Per the fact sheet published by the agencies, the changes would result in an estimated 16% aggregate increase in common equity tier 1 capital requirements, and most banks impacted by the proposal would meet the new capital requirements today.

Opposition

The proposal is unlikely to be finalized as-is because of concerns raised by members of the agencies about deviation from the Basel III endgame standards, along with the industry-wide pushback on the proposal. Many industry groups opposed to the proposal argue that an increase in capital requirements isn’t necessary and is likely to harm the economy and competitiveness of the U.S. banking industry.

They argue that the proposal would increase operating costs and that banks could lose significant market share to fintechs and private equity firms not subject to the same rules. (Countering that argument are people who feel that fintechs should be subject to similar rules – meaning don’t lessen the rules for banks, rather increase the rules for fintechs.) Costs will increase due in part to the requirement in the proposal that large banks perform two calculations – one under the new expanded risk-based approach and one under the current standardized approach, using the lower of the two for each risk-based capital ratio.

Patrick McHenry (R-North Carolina), chair of the House Financial Services Committee, and GOP colleagues have requested the agencies to rescind their proposal amid bipartisan congressional scrutiny surrounding the plan. Industry groups have been vocal in their disdain for the proposal and have requested the underlying data the agencies relied upon as well as a re-proposal with a new comment period.

Timing

The final rule isn’t expected until 2025.

The new rule would have a phased approach across approximately three years, with the final phase due July 1, 2028.

The comment period ends November 30, 2023. The agencies have indicated that they will use this time to collect data to refine their understanding of the proposal’s impact.

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